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Thursday, March 14, 2019

Open Electricity Market - Why Cheaper Than Singapore Power?

By now, many of you would have heard of the open electricity market and have seen the roadshows by many of the new electricity retailers who are offering much lower prices than Singapore Power (SP) group's current electricity tariff. There are as many as 13 different new retailers now apart from SP group. Many of you might have seen the prices and know that it is indeed lower but is there a catch to all these lower prices? Should we all be switching to these new electricity retailers to take advantage of the lower prices?

To answer all the above electrifying questions, we have to understand what is the open electricity market first. I know there are lots of info out there and it is confusing so in this article I will explain why electricity retailers can offer rates cheaper than SP group and why SP group could not in a simple to understand way.

What is Open Electricity Market (OEM)?
Before OEM was opened to residential estates, we could only buy power from SP group. However, OEM is not new in Singapore actually. Prior to OEM being opened to residential estates, business consumers with an average monthly consumption of at least 2,000 kWh (approximately $400 in electricity bill) can buy electricity from other licensed electricity retailers already.

There are 3 main players in the industry. Firstly is power generation companies, then electricity retailers and lastly are the consumers. Power generation companies are power plants that generate electricity. In the wholesale electricity market, they bid to sell their power to electricity retailers in bulk. Then, electricity retailers compete to sell it to consumers like you and me.

Why new electricity retailers can offer cheaper rates as compared to SP group?

In the OEM, we could buy power from other electricity retailers other than SP group. These new retailers are either the retail arm of power generation companies or independent retailers who buy power from these power generation companies at wholesale prices. Previously, SP group is the only company who buys power from these power generation companies and in turn sells it to us.

With the OEM, we can now buy electricity directly from power generation companies instead of going through a middle man like SP group. It is like we buy goods from a wholesale warehouse instead of from a retail shop who also gets the goods from the wholesale warehouse and sells it to us at a higher price after accounting for their manpower and rental costs etc. Independent retailers who do not generate their own electricity but buys from power generation companies and sell to us can sell cheaper than SP group because most of their operations are online with low overhead costs.

If we look at the chart below, we can see that SP group is paid 5.71 cents per kWh, out of 23.85 cents per kWh paid by households. This comes to about 25 per cent of the tariff. About 70% of the regulated tariff goes to power generation companies. Whether we buy electricity from SP group under the regulated tariff or through retailers, the SP component collected from consumers is still the same actually.

Why can't SP group offer consumers electricity at lower rates?

Electricity tariffs are not set by SP group, but are regulated by EMA to recover the long-term costs of producing and delivering electricity to consumers. This includes fuel prices, building and operating power plants as well as maintaining the power grid. In layman terms, it means they are stuck with this kind of situation as regulated by the authority.

Isn't it unfair for them and won't SP group get into trouble if everyone switches out from them? The answer is no. As mentioned earlier, whether we buy electricity from SP group under the regulated tariff or through retailers, the SP component collected from consumers is still the same actually. This means SP group still gets its share of about 25% of electricity paid by us. SP group can now also take advantage of the situation and offer customer service solutions to these new retailers and in turn charge a fee for the services. Instead of earning from households, they can go into the business of earning from retailers in the open electricity market.

We can actually buy wholesale electricity from SP group also but the price will fluctuate every half hourly which is confusing for most consumers. It becomes we have to monitor the electricity rates across the day itself and manage our usage accordingly. In an average day, electricity prices will be highest during the day when the demand is the highest and should drop at night when demand is lower. This is how the wholesale electricity rate fluctuates.

Where can I compare the best OEM price plan if I want to switch?I have helped my parents switched our electricity from SP to Geneco fixed price plan which is 30% lower than the current SP rate. I did not do any comparison beforehand as I think the competition is intense enough and most of the retailers are offering roughly the same package. Just make sure to read the terms and conditions properly as some retailers do charge admin fees or collect deposits. Nevertheless, if you want to compare the prices, you can do so easily too.

3/4 of the population can now switch to enjoy lower electricity rates. Here are the zones as well as when you can start to switch:

Zone 1 - Postal code 58-78, From 1st Nov 2018

Zone 2 - Postal code 53 – 57, 79 – 80, 82 – 83, From 1st Jan 2019

Zone 3 - Postal code 34 – 52, 81, From 1st Mar 2019

Zone 4 - Postal code 01 – 33, From 1st May 2019

In conclusion, the open electricity market allows us to buy electricity directly from power generation companies without going through a middle man. This definitely lowers the cost of electricity for the consumers. To enjoy sustainable long term low cost on our electricity bills, I think its better to sign up with those retailers who are the direct retail arm of power generation companies with big power plants. In this way, they can always offer cheaper electricity rates as compared to other companies who just resell the electricity to us.

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